Kenya: Moody’s Downgrades Kenya’s Credit Rating After Ruto Withdraws Controversial Tax Bill

Moody’s Downgrades Kenya’s Credit Rating After Ruto Withdraws Controversial Tax Bill
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Moody’s, the credit rating agency, has downgraded Kenya’s sovereign rating to junk status, citing the country’s reduced ability to meet its debt obligations. This downgrade follows President William Ruto’s decision to withdraw a controversial tax bill amid recent protests.

On Monday, Moody’s downgraded Kenya’s credit ratings from B1 to Caa1 for local and foreign currency long-term issuer ratings and foreign-currency unsecured debt. This downgrade reflects the nation’s heightened fiscal challenges.

Kenya’s decision to retract the controversial tax measures came after two weeks of intense protests aimed at de-escalating tensions. President Ruto has proposed a 9% spending cut for the 2024/2025 budget, a move Moody’s acknowledges will help narrow the fiscal deficit.

However, Moody’s expressed skepticism about the country’s ability to introduce new revenue-generating measures following the recent protests, which turned deadly on June 25, resulting in at least 41 fatalities. The withdrawn 2024 Finance Bill had aimed to raise an additional $2.7 billion to manage Kenya’s growing debt and fund development programs.

“The downgrade of Kenya’s rating reflects significantly diminished capacity to implement revenue-based fiscal consolidation that would improve debt affordability and place debt on a downward trend,” Moody’s stated.

Moody’s noted that the government’s reliance on expenditure cuts rather than pursuing planned tax increases represents a significant policy shift with substantial implications for Kenya’s fiscal trajectory and financing needs.

While the spending cuts proposed by President Ruto are expected to enhance the country’s liquidity, Moody’s remains concerned about Kenya’s fiscal outlook. The credit agency now projects that Kenya’s fiscal deficit will narrow more slowly than previously anticipated, leading to prolonged weak debt affordability.

“As a result, we now expect the fiscal deficit to narrow more slowly, with Kenya’s debt affordability remaining weaker for longer. In turn, larger financing needs stemming from a wider deficit increase liquidity risk against more uncertain external funding options,” Moody’s stated.

This downgrade underscores the challenges facing East Africa’s largest economy as it grapples with fiscal constraints and the need for sustainable economic policies.

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